In defence of pre-packs

The recent pre-pack administration of segments of London Town, the indebted pubco, has reignited concern surrounding this controversial method of business protection.

Critics condemn the practice of an indebted company getting together with its lead creditors - often its banks - and a team of administrators to effect a post-administration buy-back of the 'healthy' parts of a company, arguing it can leave small unsecured creditors in the lurch. But others say that so long as the process is transparent it is often the best way to keep a business going and save jobs.

Here, two of the parties involved - London Town administrator David Chubb of PricewaterhouseCoopers, and Steve Rodell, head of bank support and business recovery at Christie + Co, the agent marketing 44 leased London Town pubs - put the case for the defence.

David Chubb, PricewaterhouseCoopers

"A pre-pack is neither good or bad in itself, but should only be used if there isn't a more appropriate alternative. What makes the difference is what goes on behind the scenes. There must be sufficiently wide marketing to solicit the highest value for the business - which is in the best interest of the creditors.

Used appropriately, pre-packs can be an effective and necessary tool for rescuing businesses in distress. However, a pre-packaged sale of a business does not absolve the insolvency practitioner from his or her duty to obtain the best price for the business in question.

Pre-packs have saved many businesses and jobs and will continue to be instrumental as the UK manages its way through this recession. An accelerated disposal process, which ends in a pre-pack insolvency transaction, can often maximise the return for creditors by preserving at least some of the value for a business's goodwill and brands."

A pre-pack is positive when used in the right circumstances, but can only arise when a company is insolvent.

When a company is insolvent or becoming insolvent, the duty of the directors is to seek to find an option which is best for creditors as a whole.

At this point, there is not going to be any solution that avoids people losing money - that is a key characteristic of an insolvency situation; the company does not have money to pay all of its debts.

The company therefore has limited options and none of them is going to enable all creditors to be repaid. In these circumstances, a pre-pack could be an option.

When faced with the prospect of insolvency, the directors will look at the options which are available to them and assess which could provide the best realisation of value from the assets of the company. The value realised is distributed to the creditors.

In order to avoid insolvency, the directors will most likely have explored all options which may have been able to save the business by raising cash, such as seeking a buyer, new financier or rescheduling debts and creditor payments.

If these options have been unsuccessful and insolvency is therefore inevitable, then it will be important to assess which insolvency process and strategy may be appropriate."

Steve Rodell, Christie + Co

"Described as a 'revolving door' administration and 'highly dubious' by its critics but a 'legitimate process' by administrators of the failed operation, pre-packaged administrations (pre-packs), which have become increasing common in the pub sector over the past two years. They continue to divide opinion and raise eyebrows.

Since January 1, 2009, insolvency practitioners have had to comply with Statement of Insolvency Practice 16 (SIP 16) - one of a series of guidance notes issued by the Insolvency Service to licensed insolvency practitioners with a view to maintaining standards by setting out required practice and harmonising practitioners' approaches to particular aspects of insolvency.

In principle there is nothing wrong with a pre-pack deal, as in many instances it offers the best chance for a company's survival.

Independent research into pre-packs by Dr Sandra Frisby of Nottingham University established that in over 90 per cent of pre-packs all the jobs in the business are saved, compared with only about 60 per cent in other insolvent business sales.

A pre-pack refers to an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment.

It is this rapid transition from failed company to a new business but without onerous or loss-making elements, often run by the same management, and apparent lack of transparency during the process, that has caused the most alarm to observers.

If the administrator feels directors are abusing the system, or are simply bad business people, it is responsible under SIP 16 for being strong enough to decline the pre-pack arrangement. However, if the administrator chooses to use a pre-pack it is because there is a genuine belief that it will serve the best interests of creditors.

The majority of pre-packs can salvage an otherwise profitable and successful business, which has been hit by unforeseen circumstances. However, proper controls on the handling of the pre-pack process need to be instilled, so that this fast-track saving of jobs is handled responsibly and is not a licence for bad management."